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Tensions rise as credits for solar cut into utility budgets; VEC is the third utility to hit 4 percent cap

A rift is forming between Vermont’s burgeoning solar industry and some of the state’s smaller utilities.

At issue is a law that compels utilities to credit customers for the solar power they produce. Some small utilities want to change the funding arrangement because they say it kicks the cost of maintaining the grid to other customers, while developers argue the policy places an accurate value on solar production and should remain intact to continue growing jobs and Vermont’s renewable energy portfolio.

Two weeks ago, the Vermont Electric Cooperative became the third utility in the state to hit the cap for funding its so-called net metering clients – those customers generating electricity from renewable sources at less than 500 kilowatts per hour (kWh).

A utility no longer has to accept applications for net metering systems when the capacity of a utility’s total net metering surpasses 4 percent of its peak demand from the previous year or from 1996, whichever is greater.

Washington Electric Cooperative was the first to reach the 4 percent mark, but the rural utility is still accepting net metering systems. Hardwick Electric Department recently hit the threshold and is not accepting new clients. For more on this issue, read here.

Vermont Electric CEO David Hallquist said the state’s second-largest utility would not accept new net metering systems until a short-term plan is devised to mitigate “cross-subsidization” between customers.

“When you look at existing net metering, those people who don’t have net metering end up subsidizing those that do,” he said. “The money has to come from somewhere, so it comes from other customers.”

VEC is shifting roughly $135,000 in missing revenue for fixed costs from net metering onto non-net metering customers, Hallquist said, and Hardwick Electric’s general manager said the utility is shifting about $50,000. Washington Electric’s new general manager Patty Richardson said it’s “premature” for her to predict how the net metering program will shift costs, if at all.

Hallquist said VEC is holding onto new net metering applications in the order they arrive and will meet with the Department of Public Service on July 19 to discuss solutions.

“One of the short-term fixes we could do is just allow residential net metering,” he said. “What’s really killing us are the large commercial net metering projects at about 500 kW. Our average solar installation on the home is about 6 kW.”

Officials from all three utilities have said that the current financing system must change because net metering customers are not paying their fair share of the grid’s fixed costs. Solar developers and the state’s largest utility, Green Mountain Power, argue that these small generators add value to the grid, and they say the elevated credits are driving the state’s energy sector into greener pastures.

How net metering works in Vermont and how Hallquist wants it to work

Under Vermont law, a utility must credit a net metering client at least 20 cents for every kWh the client produces.

Vermont Electric charges 17 cents per kWh. Therefore, a net metering client pays 17 cents for every kWh he or she uses, but receives 20 cents for every kWh produced.

The difference between the 17 cent retail rate and the 20 cent credit is called an “adder,” and that additional credit – in this case it is 3 cents – is locked in for 10 years by contract with each net metering customer. If Vermont Electric were to raise its rates to 18 cents, the new credit for those customers would be 21 cents because the 3-cent adder is fixed.

If different clients began net metering later, when the retail rate was already set at 18 cents, then the adder those clients would lock into would be 2 cents because the standard credit by law is 20 cents.

“The idea of the incentive was to motivate people to use solar, and we’re at a place right now where the cost of solar has come down so much that these incentives are no longer needed,” Hallquist said. “It’s one of the cases where public policy worked, and now we believe it’s time to do it the right way. I think we have to take away the 20-cent incentive; it ought to be based on the retail rate of power.”

Under this part of Hallquist’s proposal, Vermont Electric would credit future net metering systems at 17 cents per kWh, if the rate of power were still 17 cents.

The second part of Hallquist’s proposal would limit how the net metering credits could be used.

Net metering customers can use credits to pay off efficiency and customer charges to reduce their monthly utility bill to nothing. Efficiency charges are leveraged by volume and fund the state’s energy efficiency utility program, Efficiency Vermont. Customer charges pay for a utility’s fixed costs, such as infrastructure and administration.

Regardless of how much power a customer uses, a utility must have infrastructure, such as poles and lines, in place to supply the customer’s needs. Hallquist and officials from other utilities have voiced support for limiting the credits’ application to kWh charges so that customers can’t zero out a utility’s fixed-cost charges.

Rep. Tony Klein, chair of the House Natural Resources and Energy Committee, spearheaded the current net-metering law, and he supports this latter proposal.

But, he said about Hallquist’s two proposals, “It’s one or the other.” And Klein is for the other.

“The problems that we’re seeing with net metering are a result of the success of the policy. They’re good problems,” he said. “I see us addressing the issues of the customer and efficiency charges. But I also see us going to net metering larger systems and eventually removing the (4 percent of peak demand) cap.”

While solar developers fully support removing the cap, they aren’t as gung-ho about limiting how credits can be used.

Facing off with developers

More than 85 percent of net metering systems in Vermont are photovoltaic solar installations, and James Moore says that percentage is growing.

Moore is president of SunCommon, the benefit corporation that spun out of a successful solar adoption program by the Vermont Public Interest Research Group, where Moore was the energy advocate. In its one-plus year existence, Moore says SunCommon has sold more than 3 megawatts worth of solar installations and has doubled its staff to nearly 30. Roughly one-quarter of all SunCommon installations have been in Vermont Electric Co-op territory, which covers eight counties in the northern region of the state.

At the heart of that growth, he said, is the state’s net metering law, which he advocated for in 2011.

“It’s the foundation for the industry,” he said. “These are long-term investments. You need some certainty related to the value a homeowner and a business are going to get back.”

State data shows that net-metering applications nearly doubled after the new net metering laws went into effect, from 358 in 2011 to 603 in 2012.

Moore says Hallquist’s proposal to credit small solar producers at the residential rate of power “woefully undervalues solar and would kill the industry in Vermont.”

He is also opposed to limiting the credit to kWh charges because solar installations would be smaller. If the credit can only be applied to the kWh charge, the size of the system needed to offset the charges is reduced. This means more expensive installations and less business, he said.

“It’s not a premium. It’s not a subsidy. Solar is valuable to our electric grid, and the customers should be paid that value,” Moore said. “Rather than taking millions of dollars and shipping it out of state or out of country for power production, this is taking that investment and putting it to work with people in our communities, producing our own clean energy. So, to hear utilities ‘woe is me the world is changing,’ it is changing, and thank goodness it is.”

Andrew Savage, spokesman for the solar firm AllEarth Renewables, said his company is concerned about potential revisions to the law.

“One of Vermont’s only well-functioning renewables programs is net metering,” he said. “We’re far behind neighboring states like Connecticut and Massachusetts in terms of renewables. Fundamental changes to the net metering program might be quite damaging.”

Savage, like Moore, said that whether the utilities like it or not their world is changing, and it’s changing fast.

“As we approach greater electrification of our economy, including transportation and thermal heating and cooling, the utilities will have to look at how distributed generation, smart metering and greater demand works for their utility model,” he said. “In the past, we’ve seen utilities very reluctant to change their model, but that change is coming.”

Moore points to a Department of Public Service evaluation of net metering that finds solar installations range in real economic costs from a fraction of a penny per kWh on a 4 kW system to several cents for a 100 kW installation. When greenhouse gas values are included, the net cost becomes a net benefit in dollar terms.

“Net metered systems do not impose a significant net cost to ratepayers who are not net metering participants,” the report says.

But every utility provides power to different demographics. While the net metering policy is aimed at cushioning peak demand with more solar power on sunny days, it does little to provide power for residential utilities that peak on Sunday nights. And one utility is enjoying those benefits of net metering much more than others.

The Green Mountain giant and the state

Green Mountain Power (GMP) is the state’s largest utility, providing power to more than 250,000 customers, or 70 percent of the state’s electricity market. By comparison, Vermont Electric powers 34,000 customers, Washington Electric powers 10,500, and Hardwick Electric powers 4,200.

GMP pioneered the state’s current approach to net metering by offering a 6-cent adder years before the state set the 20-cent credit level. Today, GMP still provides its customers with a 6-cent premium, which brings the credit to more than the 20 cents required by law.

Net metering capacity accounts for about 2.5 percent of GMP’s peak demand, and utility representatives say it is not financially burdened by the state policy, touting the benefits of the local solar at peak demand times.

At a meeting of utility executives, solar developers and state officials, GMP CEO Mary Powell called on her peers to innovate and “adjust to the new normal.” She said last week that utilities should be looking for ways to cut costs by moving toward more distributed, or regionalized, generation. And they should move swiftly.

“I think having a cap is a huge problem. There should be no cap,” Powell said. “We should figure out how to adapt to this new future that is here and is what our customers want.”

Geoff Commons, director of public advocacy for the Public Service Department, sat silent for most of the meeting. After more than an hour, he chimed in.

“How many customers can you have paying zero and still maintain equities in your rates and still maintain poles and wires and vegetation management?” he asked. “There’s the real cap.”

Commons said all customers should be contributing their fair share to the grid they use.

“I’m totally on board with renewable energy in general,” he said. “My problem is that it should not be financed in a regressive manner, and my concern is justice for the people who can’t afford to put solar panels on their home … They can barely play with their kid when they get home from their third job. Those are the folks I tend to think about.”

Chris Recchia, commissioner of the department, said after the meeting that his goal is to form a consensus among the utilities and the developers before the legislative session and provide Klein’s committee with a course of action at the outset of the 2014 legislative session.

“We know there are challenges associated with the success we’re having,” he said. “The urgency behind this is that we should see if we can resolve this so that utilities don’t feel they’re at risk. Ultimately, there will need to be legislative action, but there are other issues we can address in the interim.”